Rollover Risk, Not Maturity, Decides Which Deals Happen

Conventional wisdom suggests that rollover risk is simply a maturity problem: the sooner your debt comes due, the more exposed you are, especially if there are near-term maturity towers. If that were the entire story, then maturing debt should weigh heavily on a firm's largest decisions. Yet if you ask CEOs why they walked away from acquisitions, you will rarely hear "because some of our bonds come due next year." By the refinancing frequency yardstick, they would be right: looming debt, measured that way, barely moves deal-making at all. But that is precisely because maturity alone is an imperfect proxy. In our new research, we propose a more refined measure — and the picture changes entirely. Rollover risk, measured as potential refinancing loss × refinancing frequency, emerges as a powerful and yet simple determinant of corporate dealmaking.

The reason maturity alone may be often misleading is straightforward: refinancing is costly only when refinancing must be done under unfavorable terms. Consider two firms, both rolling over debt next year. One's bonds trade above par, and frequent refinancing actually lowers its borrowing costs and hence produces refinancing gains (instead of losses). The other firm's bonds trade at a discount, and every rollover realizes refinancing losses (instead of gains). Put differently, same maturity, opposite risk — and a maturity-only measure cannot distinguish them. In contrast, our novel market-based measure combines two things that have been heretofore ignored: how large a loss a firm incurs each time it refinances — inferred from how far its bonds trade below face value — and how frequently it must refinance. A firm is exposed to rollover risk only when both are high: it returns to the market repeatedly, and it incurs a loss each time it does so.

What does our novel measure predict? Fewer deals, and smaller ones. Notably, a one-standard-deviation rise in rollover risk reduces the probability that a firm makes an acquisition by about 2.5 percentage points, against a sample average of 21%, and shrinks the deals that do proceed by roughly 20% of the average size. In essence, this is a modern, market-based counterpart to debt overhang that Stewart Myers first studied almost fifty years ago. We term it maturity overhang: firms confronting an expensive refinancing curtail large, cash-intensive investments in order to preserve financial slack.

It also reshapes how firms pay. Interestingly, a one-standard-deviation increase in rollover risk lowers the probability of an all-cash offer by 4.3%, as firms conserve cash against the coming refinancing and turn to equity instead. This is a precautionary response, not a financing afterthought — and the standard maturity-only proxy detects none of it.

Our paper’s most intriguing insight concerns how equity markets interpret these important corporate decisions. For decades, corporate finance has read an all-cash bid as a confidence signal: management is sufficiently certain of the deal to commit cash rather than its own shares, and investors reward that decision, taking the acquirer’s decision as a signal that its shares are likely undervalued. We find that reward is more nuanced. Equity markets respond favorably to cash deals — a 1.5% excess return over three days — only when acquirers face low rollover risk. When rollover risk is high, that reward disappears. Our striking result implies that the signal has never really been about cash and avoiding equity, but rather it is about the financial flexibility cash implies. Once that flexibility is absent due to heightened opportunity costs of using cash when rollover risk is high, the conventional view of cash as good news wanes.

Skeptics may raise at least two concerns. First, might rollover risk simply proxy for credit quality? We control for credit ratings throughout, and the effect survives. Second, firms that are already planning acquisitions arrange their debt maturities in anticipation, so rollover risk and dealmaking move together simply because the same managers set both jointly — not because rollover risk shapes deals. To address reverse causality, we exploit the Federal Reserve's 2011 Maturity Extension Program — a policy shift that altered firms' refinancing conditions for reasons unrelated to their own dealmaking. By lowering long-term yields, it led firms to extend their maturities, with average bond maturity rising from roughly six years to eight. Relying on this externally driven variation, we find that the negative relationship between rollover risk and M&A persists, suggesting it is not merely an artifact of firms' anticipatory maturity choices. Moreover, rollover risk explains about 11% of the time-series variation in merger activity, at the aggregate level, and largely subsumes the predictive power of credit spreads, which have long served as the workhorse predictor of merger waves.

The combination of these findings based on a basic and intuitive measure underscores that financing and investment decisions cannot be considered independently. A firm's debt maturity structure, interacting with prevailing credit conditions, influences not only whether acquisitions are undertaken, but even how they are financed and how the market evaluates them. For corporate managers, this implies that a firm's maturity (or refinancing) profile warrants the same attention as its investment opportunities, both external and internal ones. For boards and shareholders, it suggests that the method of payment in an acquisition should be interpreted in light of the acquirer's rollover risk, rather than read as an unconditional signal.

The results also have implications for policy makers. Interventions that alter the maturity structure of corporate debt, such as the Maturity Extension Program, may shape corporate investment and financing behavior well beyond their immediate effect on interest rates. More broadly, our evidence indicates that rollover risk — the product of debt maturity and refinancing conditions — is an economically meaningful determinant of corporate decision-making, one that conventional maturity-based measures fail to capture.

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Dirk Hackbarth is a Professor of Finance at the Boston University Questrom School of Business, and an ECGI Research Member.

Zhiyao Chen is an Associate Professor of Finance in the Department of Economics and Finance at the City University of Hong Kong (CityU).

Jarrad Harford is the Paul Pigott - PACCAR Professor of Finance and Chair of the Finance and Business Economics Department at the University of Washington’s Foster School of Business, and an ECGI Research Member.

Yuxin Luo is a Ph.D. candidate in Finance at Boston University (BU).

This blog is based on a paper presented at the Tenth Annual Mergers and Acquisitions Research Centre (MARC) Conference, held in London and hosted by Bayes Business School in collaboration with ECGI. Visit the event page to explore more conference-related blogs.

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